Figures released by the Verband deutscher Pfandbriefbanken (VdP), the Association of Pfandbrief-issuing banks, highlight the substantial year-end decline in German property prices.
The VdP Index, a robust indicator based on real transaction data from over 700 German banks, recorded a decline of 7.2%, with the current index standing at 175.2 points (base year 2010 = 100).
Residential property prices experienced a significant 6.1% decrease in the fourth quarter of 2023 compared to the same period in the previous year. Since the peak in the second quarter of 2022, residential property values have plummeted by a total of 8.4%, signaling a challenging period for homeowners and investors alike.
Commercial property prices faced an even more substantial decline, with a record-breaking 12.1% drop year-on-year. The commercial property segment, particularly office spaces, saw a decline of 5.2% in the fourth quarter of 2023 compared to the previous quarter.
In the seven major German cities, residential property prices demonstrated relative resilience, with an average decline of 5.1% compared to the national average of 6.1%. Berlin, Düsseldorf, Frankfurt am Main, Hamburg, Cologne, Munich, and Stuttgart witnessed varying degrees of price declines, with Munich and Frankfurt experiencing the most substantial drops.
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Jens Tolckmitt, Chief Executive, vdp
VdP's Managing Director, Jens Tolckmitt, foresees a continued downturn at the beginning of 2024, with prices expected to stabilise in the summer for residential properties. Commercial property prices, however, may not find stability until the end of the year. The overall market is anticipated to remain challenging, although signs of easing downward trends are expected.
"A turnaround in property prices, which has already been the subject of much public speculation, is not yet in sight," said Tolckmitt. "2024 will also remain difficult for the time being."
The VdP's view on the housing market remains gloomy. "The rental trend shows: Housing remains a very scarce commodity in Germany, especially in urban centres. In view of the decline in housing completions, we must expect the housing shortage to increase even further in the coming years. This would result in further increases in rents. This is why we now urgently need to implement the measures agreed in the Alliance for Affordable Housing, as well as other measures," Tolckmitt commented, in a direct appeal to the politicians in Berlin.
And the outlook was not much more positive for commercial property. As Tolckmitt emphasised in the report, "The property crisis is hitting commercial property harder than residential property. The current focus is particularly on office properties, where yields across the board have clearly not yet reached the level expected by investors. In addition, due to the uncertainty surrounding economic development in Germany and the still unclear effects of the home office trend on the required office space, demand for offices remains subdued, which is putting further pressure on prices. In contrast, retail properties have already made significant progress in the cycle, as indicated by the first increase in new contract rents in more than four years,"
The commercial property crisis has reached German financiers, with Deutsche Pfandbriefbank increasing risk provisions in the fourth quarter of 2023, while being forced to make an unscheduled statement to investors regarding its liquidity position (see story elsewhere in this issue).
Deutsche Bank too boosted its provisions for loan losses, particularly against its exposure to US commercial property. There it has lent €17bn against US commercial property, of which €7bn is offices. This latter represents about 1.5% of the bank's loan book.
Reports suggest that the European Central Bank (ECB) is considering higher capital requirements for banks with problematic commercial property loans, adding a layer of uncertainty to the financial landscape.
The VdP Index publishes quarterly rental and price indices on the basis of real transactions that have taken place, as against advertised prices, from data submitted by over 700 German financial institutions, as well as all the most important property lenders. The index is part of the Deutsche Bundesbank's property price monitoring.
